What’s Next for the DOJ After Defeat in AT&T-Time Warner Trial?

UPDATED WASHINGTON — After its definitive defeat in the AT&T-Time Warner trial, the Justice Department’s Antitrust Division is now weighing whether to appeal.

On Wednesday, a number of public interest groups, Wall Street analysts, and lobbyists were also asking another question: Will this make the DOJ more reluctant to challenge other vertical transactions?

As he left the federal courthouse in Washington on Tuesday, Makan Delrahim, the Justice Department’s antitrust chief, said that they would review the opinion of U.S. District Judge Richard Leon “to see what impact it will have on other mergers.”

The DOJ is mulling whether to appeal. The government could also seek a stay to halt the transaction from moving forward as it weighs that decision, but the Justice Department would have to decide by Monday. Leon made clear that he would reject a stay, but the DOJ could also seek such a ruling from the Court of Appeals.

Speaking to a gathering of the National Music Publishers Association on Wednesday, Delrahim said, “We have put on a case to the best of our ability. Courts speak. There is an appellate process that the Constitution … provides to correct any error.

“At the end of the day, in our system, unlike Iran, we respect that dispute resolution system and move on,” he said. Delrahim, who was born in Iran, immigrated to the United States with his family when he was 10 years old.

President Trump has yet to weigh in on the ruling, but it has revived company claims that his opposition to the transaction, and disdain for CNN, influenced the decision to bring the case.

A Time Warner executive vice president and spokesman, Gary Ginsberg, made it clear that they think politics were involved. He said on Tuesday that Leon’s “resounding rejection of the government’s arguments is confirmation that this was a case that was baseless, political in its motivation and should never have been brought in the first place.”

Delrahim has denied that Trump influenced the decision to sue to block the merger.

Leon’s opinion did not delve into those questions, as he rejected efforts by AT&T-Time Warner to pursue such a line of defense.

He also wrote in his opinion that “the temptation by some to view this decision as being something more than the resolution of this specific case should be resisted by one and all!”

That did little to quell consternation among an array of public interest groups and antitrust lawyers that the stakes were so high in the case that it naturally will have an impact on future enforcement.

The Justice Department will face just those questions very quickly with another potential vertical media merger unveiled on Wednesday. Comcast submitted its offer for many of the assets of 21st Century Fox, one to rival a Walt Disney Co.-Fox combination that was announced in December. Comcast made clear in its proposal that it had been awaiting the AT&T decision.

Matthew Polka, the president of the American Cable Association, which represents smaller cable providers, has already called on the Justice Department to block a Comcast-Fox combination, saying that it would “only increase its ability to harm consumer welfare.”

He said that the government, including the DOJ and FCC, “should continue to rigorously review existing and proposed vertical combinations and impose sufficient remedies to offset their harms.”

Others worry about the fallout from the DOJ’s loss of the case.

“If [the AT&T decision] is not going to be a chill on antitrust enforcement, I don’t know what is,” said Gigi Sohn, fellow for the Georgetown Law Institute for Technology Law & Policy and former counselor to FCC chairman Tom Wheeler. “The Antitrust Division is going to be disinclined to challenge vertical mergers.”

She wishes that the Justice Department would have pursued an argument that had to do with access to the internet, or net neutrality, but the FCC recently rolled back many of those rules.

Ketan Jhaveri, former antitrust attorney at the Justice Department’s telecommunications task force and co-CEO of legal tech platform Bodhala, suggested that Leon’s opinion will make “the government tremendously gun shy.”

“This is the nightmare scenario,” he said, given the high-profile nature of the case.

He also said that it could change the dynamics of the way that companies key up their proposed mergers. Because of AT&T’s victory in court, “Comcast is going in [to its Fox deal] saying, ‘Not only do we have fear that the government will block the deal because of vertical concerns, we don’t even need to offer these conditions.'”

Diana Moss of the American Antitrust Institute said in a statement that “this setback in antitrust enforcement, coupled with the recent rollback in network neutrality rules is a ’one-two punch’ for competition and consumers.”

In the AT&T-Time Warner case, the government’s expert, Carl Shapiro, concluded that the cost of the merger to pay-TV subscribers was at least 27 cents per month, but the companies attacked his methodology, and Leon found the projections unconvincing.

“Someone has got to make the call at the DOJ to ask, ‘What is the threshold at which we will sue to block a merger?'” Singer said. If the predicted price increase is in the pennies, like it was in the AT&T deal, the DOJ should be willing to reach a settlement with “behavioral” conditions placed on the transaction that guide competitive conduct, he said. “If it is a material effect on prices, then by all means sue,” he said.

But Delrahim has criticized so-called “behavioral” remedies as ineffective, and says that they put the Justice Department in the position of acting as a regulator. He said that he favors permanent “structural” solutions, in which merging companies agree to divest assets. In the case of AT&T-Time Warner, the DOJ said that they would approve the deal if the companies sold DirecTV or gave up control or divested the Turner Networks. The companies refused, and the government filed its lawsuit.

Outside of court on Tuesday, Delrahim told reporters that the decision “does not change our view that a structural remedy is the best way to protect American consumers.”

A number of groups are urging the Justice Department to appeal, but the burden will be on the government to show where Leon made a mistake in applying the law.

Jhaveri said there could be an opening for a DOJ argument in how Leon characterized the relevant competitive landscape. The Justice Department said it was the traditional universe for live pay-TV subscribers, while AT&T-Time Warner argued that they face an increasingly competitive landscape of big tech rivals like Facebook, Netflix, and Google.

In his opinion, Leon wrote that “although the government is of course correct that the refrain ‘we are getting killed by new competition in different markets’ is no ‘defense to an illegal merger,’ I simply cannot evaluate the government’s theories and predictions of harm, as presented by the Government at trial, without factoring in the dramatic changes that are transforming how consumers view video content.”

Jhaveri also said Leon “bought the AT&T argument that the reason to do the deal is so that they can have a digital ad model like Google and Facebook.” The government could again argue that such a claimed benefit of the deal wasn’t merger specific, and that AT&T could pursue such a platform without the Time Warner transaction.

Polka said that Leon’s decision was “out of the mainstream.” He argued that it was counter to “numerous findings over the past 15 years by the Federal Communications Commission and the Department of Justice that vertical combinations between video programmers and distributors require robust conditions to constrain the incentive and ability of the combined firm to raise prices to rivals and reduce choice.”

The trouble in bringing an appeal, though, is that Leon “ripped apart every single basis for the claims of anticompetitive effects,” Singer said. Perhaps most importantly, Leon found flaws in the methodology for the economic model that the government used to show consumer harm, Singer added.

“Let’s say [Leon] got it wrong on the diversion rate,” Singer said. “But there are so many other infirmities, I don’t see how you salvage this.”